New Worksheet for Calculating Tax on Schedule D, Correcting Error in Prior Version

The IRS announced the agency has discovered an error that existed in the worksheets for calculating tax due that were in the Schedule D instructions for 2018 returns (Error in Tax Calculation in Schedule D Tax Worksheet (Form 1040)[1]).  Most tax software followed the erroneous worksheet for returns prepared during the filing season.

The IRS noted the impacted returns as follows:

The tax calculation did not work correctly with the new TCJA regular tax rates and brackets for certain Schedule D filers who had 28% rate gain (taxed at a maximum rate of 28%) reported on line 18 of Schedule D or unrecaptured section 1250 gain (taxed at a maximum rate of 25%) reported on line 19 of Schedule D.

More specifically, the IRS notice on their website states:

We corrected the Schedule D Tax Worksheet in the Instructions for Schedule D (Form 1040) by renumbering line 18 as line 18a, adding new lines 18b and 18c, and updating the text on line 19 to reflect those changes.  A Form 1040 taxpayer’s regular tax calculation using the worksheet is potentially impacted if:

1.      Form 1040, Schedule D, lines 15 and 16 are both more than zero;

2.      Schedule D, line 18 or line 19 is more than zero (or both are more than zero);

3.      The taxpayer’s taxable income is more than $38,600 if single or married filing separately, $51,700 if head of household, or $77,200 if married filing jointly or a qualifying widow(er);

4.      Line 15 of the Schedule D Tax Worksheet is not more than line 14 of the Schedule D Tax Worksheet (those lines were not impacted); and

5.      Line 18 of the original Schedule D Tax Worksheet (line 18 a of the corrected Schedule D Tax Worksheet) is not more than $157,500 ($315,000 if married filing jointly or a qualifying widow(er)).

The IRS indicates that it is reviewing returns that were filed before the correction was released.  While the agency does not indicate how it will handle the correct, it did note that “[a]ffected taxpayers need not file an amended return with the IRS or call the IRS.”  Rather the agency stated that additional information will be provided later.

The IRS also indicated that it had provided software vendors with information on this error prior to the release of the new forms.  The release states:

All returns filed after May 15 should reflect the new calculation; the IRS will update any returns filed after May 15 to reflect the correct tax using the new calculation. Because the IRS has already provided the corrected worksheet to its tax software partners, anyone filing a 2018 return, including those with extensions, after May 15, 2019, are not affected by the error.

Note that the IRS did not provide information regarding when this information was provided to vendors.  CPAs who use Wolters Kluwers products may be concerned since an update to their software was released the day before the malware incident that began on May 6, and the organization indicated it was delaying an update scheduled for this weekend. 

Some of the users of the on-site version of the software who did not update before the systems were taken down likely have not yet updated their software, waiting to assure no “surprises” might exist in that package.  It seems likely that 1040s processed under the software release that was current until May 5 would contain the erroneous calculation.

The article indicates that most affected taxpayers would face a lower tax, but some will find their tax liability increased.